process review panel for the financial reporting council ... · 2008 to review cases handled by the...

Process Review Panel for

the Financial Reporting Council

2017 Annual Report

Table of Contents

Chapter 1 P. 1 - 5

Background

Chapter 2 P. 6 - 8

Work of the PRP in 2017

Chapter 3 P. 9 - 22

The PRP’s review of cases handled by the FRC

Chapter 4 P. 23 -24

Observations and way forward

Chapter 5 P. 25

Acknowledgement

Annex P. 26

Membership list

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Chapter 1 : Background

Overview

1.1 The Process Review Panel for the Financial Reporting Council

(“the PRP”) is an independent and non-statutory panel established by the

Chief Executive of the Hong Kong Special Administrative Region in

2008 to review cases handled by the Financial Reporting Council (“the

FRC”), and to consider whether actions taken by the FRC are consistent

with its internal procedures and guidelines. The establishment of the

PRP reflects the Government’s continuing commitment to enhance the

accountability of the FRC.

1.2 The FRC was established under the Financial Reporting

Council Ordinance (Cap. 588) (“the FRCO”) in 2006 as an independent

statutory body to investigate auditing and reporting irregularities by

auditors of listed entities (i.e. listed corporations and listed collective

investment schemes) and enquire into non-compliance with accounting

requirements by listed entities in Hong Kong. The FRC plays a key

role in upholding the quality of financial reporting, promoting the

integrity of the accounting profession, enhancing corporate governance

and protecting investors’ interest.

1.3 Under the FRCO, the FRC is empowered to conduct

independent investigations into possible auditing and reporting

irregularities in audits of listed entities and is assisted by the statutory

Audit Investigation Board (“the AIB”) comprising officers from the FRC

executive. The FRC is also tasked with conducting independent

enquiries into possible non-compliance with accounting requirements by

listed entities, and is assisted by the Financial Reporting Review

Committees (“the FRRC”), whose members are drawn from the statutory

Financial Reporting Review Panel comprising individuals appointed by

the Financial Secretary (under the authority delegated by the Chief

Executive) from a wide range of professions in addition to accountants.

Functions of the PRP

1.4 The terms of reference of the PRP are as follows –

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(a) to receive and consider periodic reports from the FRC on

completed or discontinued cases;

(b) to receive and consider periodic reports from the FRC on

investigations and enquiries which have lasted for more than

one year;

(c) to receive and consider periodic reports from the FRC on

complaints against the FRC or its staff;

(d) to call for files from the FRC to review the handling of cases to

ensure that the actions taken and decisions made adhere to and

are consistent with internal procedures and guidelines of the

FRC and to advise the FRC on the adequacy of its internal

procedures and guidelines where appropriate;

(e) to advise the FRC on such other matters relating to the FRC’s

performance of its statutory functions as the FRC may refer to

the PRP or on which the PRP may wish to advise; and

(f) to submit annual reports to the Secretary for Financial Services

and the Treasury.

1.5 The internal procedures which the PRP would make reference

to in reviewing the FRC’s cases include guidelines on the handling of

complaints, initiation and processing of investigations and enquiries,

review of financial statements under its financial statements review

programme, working protocols with other regulatory bodies,

preservation of secrecy and identity of informers, and relevant legislative

provisions.

1.6 The PRP is tasked to review and advise the Council on the

FRC’s handling of cases, not its internal operation or administrative

matters. Therefore, the work of the committees set up under the

Council is not subject to direct review by the PRP.

Modus operandi of the PRP

1.7 At its inaugural meeting held in mid-November 2008, the PRP

decided that except for the first review cycle that should start from July

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2007 (when the FRC became fully operational) until the end of

December 2008, all case review cycles thereafter should run on a

calendar year basis.

1.8 Based on the FRC’s caseload during the relevant review cycle,

the PRP would select cases for review at the end of the cycle, and all the

PRP members would join the case review session(s). The approach for

case selection could be reviewed or fine-tuned as the PRP proceeds with

the case review work.

1.9 Members of the PRP are reminded to preserve secrecy in

relation to information furnished to them in the course of the PRP’s work,

and not to disclose such information to other persons. To maintain the

independence and impartiality of the PRP, all PRP members would

declare their interests upon the commencement of their terms of

appointment and before conducting each case review.

Composition of the PRP

1.10 In 2017, the PRP comprised six members, including the

Chairman who is a non-accountant, a member from the accountancy

sector, three other members from the financial sector and academia, and

the FRC Chairman as an ex-officio member.

1.11 The membership of the PRP in 2017 is at Annex.

Follow-up on the PRP’s observations made in the 2016 Annual

Report

1.12 In its 2016 Annual Report, the PRP observed that a relatively

long time had been taken for handling investigation cases and a number

of reasons were identified including the increase in the number of

complaints, the resignation of subject case officers and the additional

time required for the replacement case officers to familiarise themselves

with the cases. Noting the practical difficulties and constraints faced

by the FRC, the PRP suggested the FRC to explore ways to enhance

efficiencies in handling investigation cases.

1.13 In response to the PRP’s observations, the FRC had recruited

more professional staff in 2017 to help with the increasing workload in

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the FRC. In particular, two professional staff had been recruited to

work with the existing staff to turn the financial statements review

programme into an in-house exercise. Previously, the FRC had been

relying on external reviewers on a pro bono basis to conduct the reviews

on financial statements. The FRC revamped the financial statements

review programme in 2016 to introduce “filters” in identifying areas of

likely non-compliance and/or irregularity. The filters would focus on

financial statements with certain attributes such as companies with a

change of auditors due to disagreements or unresolved issues, financial

statements with prior period adjustments suggesting that investors who

relied on prior period financial statements might have been misled,

financial statements with alleged non-compliance with accounting

and/or auditing requirements based on media reports, etc. Since 2017,

designated staff members would conduct the reviews in-house under the

“filtering” mechanism. Initial results indicated that these arrangements

were working well.

1.14 In addition, the FRC had reviewed the time required to handle

a complaint. In particular, the FRC had set an internal benchmark of

completing the assessment of an incoming complaint within 90 working

days of receipt of the complaint, i.e. decision on how a complaint should

be dealt with (e.g. initiating an investigation and/or enquiry, referring to

other regulators, closing it with no further action, etc.). The FRC had

also been critically looking at, with the assistance of external legal

advisors, the procedures for conducting investigations and enquiries with

a view to enhancing them. The objectives were to better adhere to the

requirements set out under the FRCO while maintaining the quality of

the investigations.

1.15 In response to the PRP’s question on whether the FRC had set

or would consider setting any particular deadline for completion of

investigation cases, the FRC replied that there was no specific deadline

for the FRC as cases varied from one to another and it would be difficult

to set a meaningful time frame. The FRC understood that this was in

line with the practice of major overseas regulators. At present, on

average it took the FRC about two and a half years to complete an

investigation, which according to the FRC’s understanding was

comparable to that of major overseas regulators such as the FRC of the

United Kingdom.

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1.16 The PRP had noted the follow-up action taken by the FRC in

the light of its observations made in the 2016 Annual Report and made

no further comments.

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Chapter 2 : Work of the PRP in 2017

2.1 This Annual Report covers the work of the PRP in 2017, which

reviewed reports from the FRC on cases completed by it during the ninth

review cycle (i.e. from January to December 2016).

Case review work flow

2.2 The work flow adopted by the PRP in reviewing the cases is

set out below –

The FRC executive compiled a list of cases and case summaries

The PRP reviewed and selected the cases for detailed review

The PRP conducted a case review meeting to review

the selected cases in detail

- The meeting was attended by the FRC executive, who provided

supplementary factual information and responded to questions

raised by the PRP members

- The PRP deliberated internally and drew conclusions

The PRP prepared a report setting out members’

observations/recommendations at the case review meeting, and

invited the FRC’s comments on the draft report where appropriate

Selection of cases for consideration/review

2.3 The FRC executive advised the PRP that the FRC had

completed 129 cases during the ninth review cycle. There were also 28

cases for which the review of complaints/review of relevant financial

statements under the financial statements review programme had been

completed but the investigations were still ongoing. Among these 28

cases, 13 had lasted for more than one year by the end of the cycle.

The PRP was provided with summaries of all the 157 cases for review as

follows –

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Category Distribution of cases Number

(I) Ongoing investigations/enquiries which had

lasted for more than one year

13

(II) Completed investigation cases

9

(III) Unsubstantiated cases

12

(IV) Cases that were referred to other regulatory

bodies for follow-up

4

(V) Completed review of complaints/review of

relevant financial statements with ongoing

investigations

15

(VI) Immaterial complaints

104

Total 157

2.4 Out of the 157 cases, the PRP selected the following seven

cases for review –

(a) an ongoing investigation case which had lasted for more than

one year (i.e. selected from Category I);

(b) an ongoing investigation and enquiry case which had lasted for

more than one year (i.e. selected from Category I);

(c) a completed investigation case arising from a review of

complaint (i.e. selected from Category II);

(d) an unsubstantiated case arising from a review of complaint (i.e.

selected from Category III);

(e) a case arising from a review of complaint with an ongoing

investigation (i.e. selected from Category V);

(f) a completed investigation case arising from review of financial

statements (i.e. selected from Category II); and

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(g) a case arising from review of financial statements with an

ongoing investigation (i.e. selected from Category V).

The PRP considered that the selection of these seven cases reflected a

good mix of the cases which fell within the ninth review cycle.

Case review session

2.5 After the PRP selected the seven cases for review, and with the

assistance of the FRC executive, the PRP Secretariat made preparation

for the case review meeting which was held in November 2017 to review

the selected cases.

2.6 The PRP Secretariat had invited all members to declare any

potential conflicts of interest before the meeting. At the start of the

case review meeting, the PRP Chairman further reminded members to

declare any possible conflict of interest in the cases to be reviewed. A

PRP member had declared potential conflict of interests with regard to a

case under review and was not present during the discussion of the case

concerned at the meeting.

2.7 The PRP’s observations in respect of the selected cases and its

suggestions to the FRC are set out in the following chapters.

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Chapter 3 : The PRP’s review of cases handled by the FRC

3.1 On the whole, having considered the seven cases reviewed in

the ninth cycle, the PRP was of the view that the FRC had followed the

internal procedures in handling the cases.

(1) Review of an ongoing investigation case which had lasted for

more than one year

Case facts

3.2 The PRP reviewed a complaint case which led to formal

investigations into suspected auditing irregularities. The investigations,

which were still in progress as at the end of the ninth review cycle, were

initiated in May 2014 in respect of the audits of the consolidated

financial statements of a listed entity from 2010 to 2012. It was alleged

that the auditors concerned had failed to observe and apply the relevant

professional standards required in their audits of the consolidated

financial statements concerned.

The FRC’s actions

3.3 After receipt of the complaint in July 2013, the FRC had

contacted the listed entity and the auditors concerned for information to

facilitate its review of the complaint and preparation of the complaint

assessment report. Having considered the complaint assessment report,

the Council approved the initiation of investigations in May 2014 and

directed the AIB to investigate the alleged auditing irregularities.

Another complaint on the same listed entity and two of the auditors

concerned was received in September 2014. The Council approved the

extension of the scope of two of the investigations in November 2015.

The FRC had requested the listed entity and the auditors to provide

information during the investigations. The investigations were still

ongoing at the end of the ninth review cycle.

The PRP’s areas of review

3.4 The PRP focused its review on the long time taken by the FRC

to complete the investigations. The FRC indicated that the case was

one of the longest in the FRC’s records in terms of handling time given

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its complexity and substantial amount of materials involved. The

investigations involved three different auditors of the listed entity from

2010 to 2012 respectively. The listed entity and the auditors had

requested a number of extensions in responding to the FRC’s

requirement and time had been taken to chase them for responses after

the specified deadlines had lapsed.

3.5 Noting that the FRC had chased the listed entity several times

by phone for response to its requests for information during September

and October 2013, the PRP asked whether the FRC had issued warnings

for failure to provide response. The FRC replied that it did send an

email to remind the listed entity to respond after several phone calls.

However, before a formal investigation was initiated pursuant to the

FRCO, all requests sent by the FRC to the parties concerned were made

on an informal basis, i.e. the company was complying with the FRC’s

requests on a voluntary basis. The FRC could not make use of any

statutory provisions in the FRCO, such as applying to the Court for an

order, to compel the company to comply with the FRC’s request before a

formal investigation was initiated, though in general most companies

were willing to cooperate with the FRC. The FRC indicated that once a

formal investigation was initiated, the listed entity and/or the auditor

would be statutorily required to comply with the FRC’s requirements for

information.

3.6 The PRP followed-up by asking whether, if the company or

auditor concerned was not cooperative during the pre-investigation stage,

there would be fundamental concerns that the FRC might not possess

enough information to justify the initiation of an investigation, and

whether non-cooperation itself would be a sufficient ground for

initiating an investigation. The FRC explained that the thresholds for it

to initiate investigations were stipulated in section 23 of the FRCO.

The FRC would be able to initiate an investigation if it appeared that

there were circumstances suggesting that there was a relevant

irregularity in relation to the listed entity. Therefore, generally

speaking there would be sufficient materials for the FRC to initiate an

investigation even if the listed entity or the auditor was not cooperative.

For example, for the present case, while the listed entity had been slow

in responding, the auditors were more helpful in replying to the FRC’s

requests. Based on the information gathered, the FRC had sufficient

information to seek the Council’s approval to initiate the investigations

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in May 2014.

3.7 Noting that multiple extensions had been granted to the

auditors for responding to the FRC’s requirements during the

investigations, the PRP asked if the auditors had provided reasons for

seeking the extensions. The FRC explained that according to the

FRC’s internal Operations Manual1, the party concerned would be given

three weeks’ time for replying to a specific requirement for information.

If the party requested for extension with a valid reason, an extra three

weeks would be granted. However, if further extension was requested,

the party concerned would need to provide justifications and the

approval would be sought from the Chairman of the Operations

Oversight Committee (“OOC”)2. The FRC added that it would turn

down any requests for extension if insufficient justifications were

provided by the party concerned.

3.8 The PRP noted that the listed entity had not made any response

when the FRC sent the draft investigation report to it for comment and

the FRC eventually decided to submit the draft report to the Council for

approval on the ground that “a reasonable opportunity of being heard”

had already been given to the listed entity. The PRP asked how the

FRC drew a line on “a reasonable opportunity of being heard”. The

FRC replied that the principle was to ensure that natural justice was done

or seen to be done. For the present case, more than five months had

been given to the listed entity to provide its comments on the draft

investigation report and the FRC had stated in its reminder letter to the

entity that it would proceed with the investigation report if no comment

had been received by the specified deadline. The FRC believed that a

reasonable opportunity had been given to the entity under the

circumstances. The FRC added that the arrangements were provided

under section 35 of the FRCO, which stipulated that the Council shall

give any person named in the draft investigation report a reasonable

1 The Operations Manual of the FRC sets out the internal procedures for handling complaints,

investigations, enquiries and review of financial statements under its financial statements review

programme. 2 The OOC assists the Council in formulating policies, strategies, guidelines and procedures for the

operation of the FRC, provides advice to the Council and the FRC operational staff on technical

and business issues, and considers, inter alia, reports on enquiry and investigation and

complaint/review assessment reports before submission to the Council. It comprises members of

the Council (one of whom would be the chair of the OOC) and co-opts members who have

relevant experience and expertise in accounting-related matters.

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opportunity of being heard if it considered that such person might be

adversely affected by the publication or disclosure of the report.

3.9 The PRP asked about the latest progress of the investigations.

The FRC replied that the investigations against the auditors of 2010 and

2011 financial statements were completed, and the remaining

investigation against the auditor of 2012 financial statements was still in

progress but it should be able to conclude the investigation soon.

Conclusion

3.10 Having reviewed the FRC’s handling of the case and in the

light of the above clarification, the PRP expressed an understanding of

the reasons for the conduct of the investigations to last for more than one

year, and agreed that the FRC had been handling the case in accordance

with its internal procedures.

(2) Review of an ongoing investigation and enquiry case which

had lasted for more than one year

Case facts

3.11 The PRP reviewed a complaint case which led to a formal

enquiry into possible non-compliance with accounting requirements in

the financial statements of a listed entity and formal investigations into

suspected auditing irregularities by the auditors of the listed entity.

Because of the potential non-compliance with the accounting

requirements, it was alleged that the auditors concerned had failed to

observe or otherwise apply the relevant professional standards in their

audits of the consolidated financial statements.

The FRC’s actions

3.12 Having reviewed the complaint received in July 2013 and

obtained information from the listed entity and the auditor concerned,

the Council in January 2015 initiated an enquiry into the 2013 financial

statements and an investigation against the auditor concerned of the

same set of financial statements. With more evidence gathered, the

Council decided in May 2015 to extend the scope of the enquiry to cover

the 2009 to 2014 financial statements of the listed entity and initiate

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investigations in respect of the audits of these financial statements. The

enquiry and the investigations were still in progress as at the end of the

ninth review cycle.


3.13 The PRP focused its review on the long time taken by the FRC

to complete the enquiry and the investigations. The FRC explained that

longer time had been taken to handle the enquiry and the investigations

given their complexity. Same as Case No.1, this case involved three

different auditors and six years’ financial statements. The issues

involved were also highly technical that there were fervent discussions

among FRRC members as to whether the non-compliance with

accounting requirements by the listed entity was substantiated.

3.14 The PRP asked whether the enquiry and the investigations

were conducted simultaneously, and whether the investigations would

have to depend on the results of the enquiry. The FRC confirmed that

for the present case, the enquiry into whether there was non-compliance

with the accounting requirements in the relevant financial statements

was conducted simultaneously with the investigations against the

auditors concerned. The FRC indicated that an enquiry and an

investigation could be conducted at the same time in general.

Nevertheless, in certain cases, the outcome of an enquiry might have an

impact on an investigation and it was therefore necessary to wait for the

completion of the enquiry before concluding the relevant investigation.

The FRC added that if the Council decided to appoint a FRRC to

conduct an enquiry into possible non-compliance, the FRCO required

that the FRRC should consist of at least five members (including a

convenor) drawn from the Financial Reporting Review Panel appointed

by the Government. The FRRC was required under the FRCO to

submit an enquiry report to the Council for adoption. Since these

members worked on a pro bono basis, it usually took some time to

complete an enquiry.

3.15 Noting that the draft investigation report had been sent to a

lawyer for legal vetting, the PRP asked why the FRC needed to seek

external legal services to vet the draft investigation report for the case.

The FRC replied that as the post of in-house legal counsel was vacant at

that time, the report was sent to external legal advisers for vetting. The

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FRC supplemented that an in-house General Counsel had reported duty

in November 2017, and thereafter, the General Counsel would be

consulted on investigation reports and the FRC would only send an

investigation report for external legal advice as and when necessary.

3.16 The PRP asked about the latest progress of the enquiry and

investigations. The FRC replied that the enquiry and the investigations

were drawing to a close. The FRC had sent out the draft investigation

reports to parties for comments and was preparing the draft enquiry

report. For monitoring purpose, the PRP requested the FRC to report to

the PRP through the PRP Secretary when the case was completed.

Conclusion

3.17 Having reviewed the FRC’s handling of the case and in the

light of the above clarification, the PRP expressed an understanding of

the reasons for the conduct of the enquiry and investigations to last for

more than one year, and agreed that the FRC had been handling the case

in accordance with its internal procedures.

(3) Review of a completed investigation case arising from a review

of complaint

Case facts

3.18 The PRP reviewed a complaint case which led to formal

investigations into suspected auditing irregularities by the auditors of a

listed entity. The investigations were initiated in November 2014 in

respect of the audits of the consolidated financial statements of the listed

entity in 2011 and 2012. It was alleged that the auditors concerned had

failed to observe or otherwise apply the relevant professional standards

required in their audits of the consolidated financial statements. The

investigations were completed in around 20 months’ time.

The FRC’s actions

3.19 Upon receipt of the complaint in June 2014, the FRC sought

information from the listed entity and the auditors concerned. Having

considered the complaint assessment report, the Council approved the

initiation of investigations in November 2014 and directed the AIB to

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investigate the alleged auditing irregularities. The Council adopted the

investigation reports in July 2016 which were subsequently referred to

the Hong Kong Institute of Certified Public Accountants (“HKICPA”) to

determine if any disciplinary action was warranted.


3.20 Based on the case facts outlined above, the PRP reviewed the

following steps taken by the FRC in handling the complaint case –

(a) initial screening;

(b) liaising with the listed entity and the auditors concerned to

review the allegations;

(c) preparation and submission of a complaint assessment report to

the OOC and the Council;

(d) initiating formal investigations;

(e) issuing directions by the Council to the AIB to conduct the

investigations;

(f) preparation and issue of the investigation reports by the AIB;

(g) adoption of the investigation reports by the Council; and

(h) referral to another regulatory body for follow-up.

3.21 Noting that it took the FRC more than a year to compile the

draft investigation reports, the PRP inquired if there was any difficulty in

preparing the investigation reports. The FRC replied that the issues

involved in the case were quite complex and it took time for the FRC to

prepare the investigation reports as the Council expected high-quality

investigation reports as these reports would likely become prima facie

admissible evidence in the HKICPA’s disciplinary proceedings.

Looking from a wider perspective, it took the FRC around two years’

time from receipt of the complaint to conclusion of the investigations for

the present case which was not unreasonable as on average it took the

FRC two and a half years to complete an investigation. The FRC

further added that as issues involved in recent years had become more

complex and technical, a reasonable timeframe for completing a

relatively straight forward investigation was about two years.

3.22 The PRP noted that, in selecting cases for review, the Terms of

Reference of the PRP currently had a benchmark of

“investigations/enquiries lasting for more than one year”. Given that

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most investigations were going to last for more than one year according

to the FRC, considerations might be given to changing the one-year

benchmark or providing PRP members with information regarding the

stage that these cases were in so as to facilitate them in selecting the

cases for review. The meeting discussed and agreed that the PRP

Secretary should explore with the FRC executive whether it was

appropriate to include, starting from the next review cycle, information

/indications on the stage of completion with respect to those cases

lasting for more than one year so as to facilitate PRP members to select

the cases for review.

3.23 Noting that the FRC had sent letters to the auditors, the

engagement partners and the engagement quality control reviewers

(“EQCR”) concerned during the investigations to confirm whether they

were being subject to legal proceedings, the PRP asked the purpose of

making such an inquiry. The FRC replied that according to section

35(6) of the FRCO, whether there were on-going legal proceedings was

one of the several factors that the Council should take into account when

it decided whether to publish the investigation report or not. The

Council was very cautious about publication so as not to adversely affect

any on-going legal proceedings or the reputation of any persons named

in the report. Therefore, the FRC would always ask the parties

concerned whether there were any on-going legal proceedings in each

and every investigation case.

Conclusion

3.24 Having reviewed the FRC’s handling of the case, the PRP

concluded that the FRC had handled the case in accordance with its

internal procedures.

(4) Review of an unsubstantiated case arising from a review of

complaint

Case facts

3.25 The PRP reviewed an unsubstantiated case arising from an

anonymous complaint received by the FRC in June 2015. The

complainant referred the case to the FRC alleging that the auditor

concerned might not have obtained sufficient audit evidence in their

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audits of the 2013 and 2014 financial statements of the listed entity. It

took about eight months’ time from receipt of the complaint to closing

the case.

The FRC’s actions

3.26 After receipt of the complaint, the FRC had sought information

and explanations from the listed entity and the auditor concerned.

Based on the information and explanations obtained, the FRC executive

concluded that there was no evidence suggesting that there was an

auditing irregularity in respect of the audits of the financial statements.

With the OOC’s approval of the complaint assessment report, the case

was closed in February 2016. Nevertheless, the FRC sent an advice

letter to the listed entity and the auditor concerned in relation to certain

disclosure deficiencies for educational purpose.


3.27 Against the above background, the PRP reviewed the

following steps taken by the FRC in handling the case –


(b) liaising with the listed entity and the auditor concerned to


(c) preparation and submission of a complaint assessment report to

the OOC; and

(d) closing the case.

3.28 In response to the PRP’s question of whether the FRC would

inform the anonymous complainant of the outcome of the case, the FRC

replied that the conclusion letter had been sent to the email address from

which the complaint was lodged. The FRC also added that it would

follow-up the case as appropriate should the complainant come back

with more evidence.

Conclusion

3.29 Having reviewed the FRC’s handling of the case, the PRP

concluded that the FRC had handled the case in accordance with its


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(5) Review of a case arising from a review of complaint with an

ongoing investigation

Case facts

3.30 The PRP reviewed a complaint case which led to a formal

investigation into suspected auditing irregularities by the auditor of a

listed entity. The investigation was initiated in July 2016 in respect of

the audits of the consolidated financial statements of the listed entity in

2011 and 2012. It was alleged that there was possible auditing

irregularities in the 2011 and 2012 financial statements as a total of 40

prior year adjustments had been made in the 2013 financial statements

(the audit of which was carried out by another auditor) to correct certain

non-compliance with accounting requirements in the 2011 and 2012

financial statements. The investigation was still ongoing as at the end

of the ninth review cycle.

The FRC’s actions

3.31 After receipt of the complaint in February 2014, FRC sought

information from the listed entity and the auditor concerned. The FRC

also sought assistance from the auditor of the 2013 financial statements

to prepare the complaint assessment report. Having considered the

complaint assessment report, the Council approved the initiation of

investigation in July 2016 and directed the AIB to investigate the alleged

auditing irregularities.





(b) liaising with the listed entity and the auditors concerned to


(c) preparation and submission of a complaint assessment report

to the OOC and the Council;

(d) initiating a formal investigation; and


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investigation.

3.33 The PRP noted that the FRC had been taking more than a year

to conduct the investigation, and asked for the latest progress of the case.

The FRC replied that the investigation involved 40 prior year

adjustments and a substantial amount of materials. It also indicated

that the case was held up for some time as the investigation involved

access to audit working papers kept in the Mainland. Subsequently,

having found other evidence to substantiate the allegations, the FRC

dispensed with the need to access the audit working papers kept in the

Mainland. The FRC confirmed that it would be able to conclude the

investigation very shortly.

Conclusion

3.34 Having reviewed the FRC’s handling of the case and taking

into account the clarifications made by the FRC, the PRP agreed that the

FRC had handled the case in accordance with its internal procedures.

(6) Review of a completed investigation case arising from review

of financial statements

Case facts

3.35 The case arose from a proactive review of financial statements

by the FRC under the financial statements review programme. The

investigation was initiated in September 2014 in respect of the audits of

the consolidated financial statements of a listed entity in 2011 and 2012.

It was alleged that the auditor concerned had failed to observe or

otherwise apply the relevant professional standards in the audits of the

consolidated financial statements. The investigation was completed in

around 16 months’ time.

The FRC’s actions

3.36 After reviewing the relevant financial statements of the listed

entity under the financial statements review programme, the FRC made

a number of requests to the listed entity and the auditor concerned to

provide information before submitting a review assessment report to the

Council for consideration. Having considered the review assessment

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report, the Council approved the initiation of an investigation in

September 2014 and directed the AIB to investigate the alleged auditing

irregularities. The Council adopted the investigation report in January

2016 which was subsequently referred to the HKICPA to determine if

any disciplinary action was warranted







(c) preparation and submission of a review assessment report to


(d) initiating a formal investigation;


investigation;

(f) preparation and issue of the investigation report by the AIB;

(g) adoption of the investigation report by the Council; and

(h) referral to another regulatory body for follow-up.

3.38 The PRP noted that the listed entity had sent a letter to the FRC

in June 2014, claiming that information could only be provided to the

FRC pursuant to a statutory requirement, and asked about the meaning

of the listed entity’s statement. The FRC said that this was an example

where companies did not cooperate with the FRC voluntarily as they

were not obliged to respond to the FRC’s requests for information until a

formal investigation or enquiry was initiated. In the present case, the

FRC also asked the auditor for information, which was more cooperative,

and the Council approved the initiation of the investigation in September

2014.

Conclusion

3.39 Having reviewed the FRC’s handling of the case, the PRP was

satisfied that the FRC had handled the case in accordance with its


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(7) Review of a case arising from review of financial statements

with an ongoing investigation

Case facts

3.40 The case arose from a proactive review of financial statements

by the FRC under the financial statements review programme. An

investigation was initiated in November 2016 in respect of the audit of

the consolidated financial statements of a listed entity in 2014. The

investigation was ongoing as at the end of the ninth review cycle.

The FRC’s actions

3.41 After reviewing the relevant financial statements, the FRC

made a number of requests to the listed entity and the auditor concerned

to provide information before submitting a review assessment report to

the Council for consideration. Having considered the review

assessment report, the Council approved the initiation of an investigation

in November 2016 and directed the AIB to investigate the alleged

auditing irregularities.


3.42 With the above background, the PRP reviewed the following

steps taken by the FRC in handling the case –




(c) preparation and submission of a review assessment report to


(d) initiating a formal investigation; and

(e) issuing directions to the AIB to conduct the investigation by

the Council.

3.43 Noting that there was a nine-month gap between the receipt of

a response from the auditor concerned by the FRC and the FRC

requesting for further information from the auditor, the PRP asked why

the FRC needed to contact the auditor concerned again after nine months

and whether the request could be made to the auditor earlier. The FRC

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replied that when it became necessary, further information could be

requested at any stage of the investigation, including during the

preparation of the investigation report.

3.44 The PRP asked about the latest progress of the investigation.

The FRC replied that the investigation had been going smoothly, and it

expected that the investigation report could be submitted to the Council

for approval in the first half of 2018.

Conclusion

3.45 Having reviewed the FRC’s handling of the case, the PRP was

satisfied that the FRC had handled the case in accordance with its


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Chapter 4 : Observations and way forward

4.1 On the seven cases selected for review during the ninth review

cycle, the PRP concluded that the FRC had handled the cases in

accordance with its internal procedures. Arising from the discussion of

the selected cases, the PRP observed that the number of complaints

received by the FRC had been on the rise and the investigation cases in

recent years had become more complex and substantive in nature. The

PRP was delighted to learn that the FRC had sought the Government’s

approval to recruit an additional Senior Director in 2018 which would

enable the FRC to re-shuffle certain duties amongst its executive team.

On the other hand, to facilitate the PRP to consider whether the FRC’s

case handling procedures were consistent with and adhered to the

guidelines set out in the Operations Manual, the PRP was of the view

that it would be helpful if the PRP could be provided with succinct

information before the case review session which compared the actions

taken by the FRC in respect of a case with the guidelines set out in the

Operations Manual.

4.2 The FRC took note of the PRP’s observations above and

undertook to share with the PRP the new structure of the FRC executive

team after the reshuffling of duties at the next case review session. The

FRC would also consider, starting from the next review cycle, preparing

a short summary for each selected case which compared the actions

taken by the FRC in respect of the case with the guidelines set out in the

Operations Manual.

4.3 The PRP will continue its work on the review of cases handled

by the FRC to ensure that the FRC adheres to its internal procedures

consistently. For 2018, the PRP will select cases that the FRC has

handled during the period between January and December 2017 for

review.

4.4 Comments on the work of the PRP can be referred to the

Secretariat of the PRP for the FRC by post (Address: Secretariat of the

PRP for the FRC, 15th Floor, Queensway Government Offices, 66

Queensway, Hong Kong) or by email (email address:

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[email protected])3.

3 For enquiries or complaints not relating to the process review work of the FRC, they should be

made to the FRC directly –

By post : 29th

Floor, High Block, Queensway Government Offices, 66 Queensway,

Hong Kong

By telephone : (852) 2810 6321

By fax : (852) 2810 6320

By email : [email protected] or [email protected]

mailto:[email protected]



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Chapter 5 : Acknowledgement

5.1 The PRP would like to express its gratitude to the FRC for its

assistance in facilitating the review work, and its cooperation in

responding to the PRP’s enquiries and recommendations in the past year.

Secretariat of the Process Review Panel

for the Financial Reporting Council

May 2018

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Annex

Process Review Panel

for the Financial Reporting Council

2017 Membership

Chairman

Mr. Anthony CHOW, SBS, JP

Members

Ms. Florence CHAN

Mr. Vincent KWAN4

Prof. CK LOW

Mr. KK TSE

Dr. John POON, BBS, JP (ex-officio member)

(With Secretariat support provided by

the Financial Services and the Treasury Bureau)

4 The term of appointment of Mr. Vincent KWAN expired on 31 December 2017. Ms. Edith SHIH

was appointed to the PRP with effect from 1 January 2018.

process review panel for the financial reporting council ... · 2008 to review cases handled by the...

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